BIR Ruling [DA-132-98]

March 30, 1998 BIR RULING [DA-132-98] Quisumbing Torres & Evangelista 11th Floor, Pacific Star Building Makati Avenue corner Sen. Gil J. Puyat Avenue Makati City Attention: Atty. Edgardo M. De Vera Gentlemen : This refers to your letter dated January 30, 1998 requesting on behalf of your client, COMSAT Investments, Inc. (Comsat) , for a confirmation of your opinion that no gain shall be recognized on the transfer of shares of stock by Comsat in favor of Jubilee Venture Limited (Jubilee) . It is represented that Comsat is a non-resident foreign corporation organized and existing under the laws of the State of Delaware, United States; that it is the owner of 119,462,016 Class "B" shares of stock (PGC shares) of Philippine Global Communications, Inc. (PGC) , a domestic corporation organized and existing under the laws of the Philippines; that Jubilee is a limited liability company organized and existing under the laws of the British Virgin Islands; that on January 9, 1997, Comsat entered into a Share Purchase Agreement (SPA) with Jubilee whereby Comsat agreed to sell and Jubilee agreed to buy the PGC shares at a price of US$0.30515 per share for a total purchase price of US$36,454,290.00; that the purchase price shall be paid by Jubilee to Comsat in the following manner 50% in cash and the balance of 50% shall be paid in kind, i.e. 12,790,360,000 shares (APC shares) in the capital stock of APC Group, Inc. (APC), a domestic corporation; that the par value of the APC shares is P0.01 and the 60-day weighted average price per share of the APC shares as of the date of the SPA equaled approximately P0.035 per share; that the SPA granted Comsat a put option which it may exercise in the following manner: AETcSa "1.) 4,263,453,333 APC Shares to Jubilee on 31 December 1997 at an exercise price of US$6,365,679; "2.) 4,263,453,333 APC Shares to Jubilee on 30 June 1998 at an exercise price of US$6,365,679; "3.) 4,263,453,333 APC Shares to Jubilee on 31 December 1998 at an exercise price of US$6,365,679." cDHCAE that during the pendency of the exercise period for the put option, the Articles of Incorporation of APC was amended to reflect a revaluation of the par value of its shares from P0.01 to P1.00 and the consequent reduction in the number of shares; that on December 31, 1997, a Deed of Assignment was executed whereby the put option was exercised by Comsat wherein 42,634,533 APC Shares (as adjusted at the par value of P1.00 per share) were sold by Comsat to Jubilee at the agreed price of US$6,365,679.00; and that the corresponding documentary stamp taxes were paid. In reply, please be informed that pursuant to Article 14 of the RP-US Tax Treaty, pertinent provision of which reads: "Article 14 CAPITAL GAINS "(1) Gains from the alienation of tangible personal (movable) property forming part of the business property of a permanent establishment which a resident of a Contracting State has in the other Contracting State or of tangible personal (movable) property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such permanent establishment (alone or together with the whole enterprise) or of such a fixed base, may be taxed in the other State. However, gains derived by a resident of a Contracting State from the alienation of ships, aircraft or containers operated by such resident in international traffic shall be taxable only in that State, and gains described in Article 13 (Royalties) shall be taxable only in accordance with the provisions of Article 13. IaHAcT "(2) Gains from the alienation of any property other than those mentioned in paragraph (1) or in Article 7 (Income From Real Property) shall be taxable only in the Contracting State of which the alienator is a resident." Such being the case, the gains that may be realized by Comsat from the transfer of its shares of stock in PGC in favor of Jubilee shall be taxable only in the United States, hence, not subject to Philippine income tax. SHAcID The Reservation Clause of the RP-US Tax Treaty, pertinent portion of which reads: "Article 1 "Notwithstanding the provision of Article 14 of the Convention relating to capital gains, both the Philippines and the United States may tax gains from the disposition of an interest in a corporation if its assets consist principally of real property interest located in that country. Likewise, both countries may tax gains from the disposition of an interest in a partnership, trust or estate to the extent the gain is attributable to a real property interest in one of the countries. The term "real property interest" is to have the meaning it has under the law of the country in which the underlying real property is located." (Emphasis supplied) does not apply in this case. It is to be noted that under the Reservation Clause, the Philippines may tax the gains derived from the disposition of interests in a corporation if its assets consist principally of real property interest located in the Philippines. "Principally" means more than 50% of the entire assets in terms of value (Sec. 2, Revenue Regulations No. 4-86). In this particular case, the audited financial statements of APC Group, Inc. show that its real property interest is only 0.54% of its total assets which is less than 50% of the value of its total assets. (BIR Ruling No. 77-94 dated March 17, 1994) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then ruling shall be considered null and void. HTCIcE Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)